NetLoan - Recording Monthly Swap Entries

Overview

This article covers the recurring month-end bookings for an interest rate swap that has already been configured as three NetLoan loans. NetLoan posts the interest accruals on each leg on its own; your work each period is to settle the net swap amount in cash and post the swap's fair value as a reversing journal. Follow this every period for as long as the hedge is in place.

Step-by-Step

Monthly interest accrual and settlement

Each period, NetLoan posts the accruals from the three loans, then you settle the net in cash:

1. Loan 1 (bank debt) accrues interest: DR Interest Expense, CR Accrued Interest Payable - Bank, at the floating all-in rate. Posted automatically.
2. Loan 2 (floating received) accrues into the Swap Settlement Account and the Swap Interest Net account. Posted automatically.
3. Loan 3 (fixed paid) accrues into the same two accounts, offsetting Loan 2. Posted automatically.
4. Pay the bank debt interest: DR Accrued Interest Payable - Bank, CR Cash.
5. Settle the net swap amount: receive or pay the residual balance in the Swap Settlement Account, as described below.

Determining the net settlement

The residual balance in the Swap Settlement Account after both legs accrue tells you the settlement direction and amount. The examples use the source guide's monthly figures: $1M notional, fixed swap rate 5%, floating = SOFR + 2%.

When rates are above the fixed rate, floating (6%, SOFR = 4%) exceeds fixed (5%), so the counterparty owes you.

Loan 2 (floating received) accrues:

Loan 3 (fixed paid) accrues:

The net balance is $833.33 receivable. Receive it in cash:

Net cash interest outflow is $5,000 to the bank less $833.33 received, or $4,166.67, an effective 5% fixed.

When rates equal the fixed rate, floating (5%, SOFR = 3%) matches fixed. Both legs accrue $4,166.67, so the Swap Settlement Account and Swap Interest Net account each net to zero. No cash settlement is needed.

When rates are below the fixed rate, floating (4%, SOFR = 2%) is under fixed, so you owe the counterparty.

Loan 2 (floating received, 4%) accrues:

Loan 3 (fixed paid, 5%) accrues:

The net balance is $833.33 payable in the Swap Settlement Account. Pay it in cash:

In every environment the all-in interest cost lands at the same fixed 5%.

Monthly fair value adjustment

NetLoan tracks the notional and interest legs but does not value the swap. At each month-end, post the swap's fair value as a reversing journal that reverses automatically at the start of the following month. This shows the current swap value on the balance sheet while letting the next month re-post the new value cleanly.

1. Create a journal entry at month-end for the current fair value: DR Swap Asset, CR Other Income.
2. Mark it as reversing, with the reversal dated the first day of the next month.
3. The next month, the prior entry reverses on its own; repeat step 1 with the new fair value.

Worked example across three months:

Month 1 (January), fair value $50,000. Post as reversing:

Balance sheet at Jan 31: Swap = $50,000. P&L impact: $50,000 income.

Month 2 (February), fair value $75,000. January reverses on its own (DR Other Income $50,000 / CR Swap Asset $50,000), returning the swap to zero. Then post as reversing:

Balance sheet at Feb 28: Swap = $75,000. Net P&L impact: $75,000 less the $50,000 reversal, or $25,000.

Month 3 (March), fair value $100,000. February reverses, then post $100,000 the same way. Balance sheet at Mar 31: Swap = $100,000. Net P&L impact: $100,000 less $75,000, or $25,000.

Considerations

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